Finance: Research, Policy and Anecdotes

Interesting papers - September 2018 issue

The recent IFWSAS conference at Casssaw a highly interesting set of papers. Herewith just a small set

In “Can
Technology Undermine Macroprudential Regulation?” Fabio Braggion, Alberto Manconi and show that peer-to-peer lending platforms can help retail borrowers get around loan-to-value caps and thus macroprudential regulations aimed at smoothing house price
and credit cycles. Using detailed borrower and funder data from one Chinese P2P platform, they show that the tightening of LTV caps in some but not all Chinese cities in 2013 resulted in an increase in P2P lending in the affected cities, consistent with
borrowers tapping P2P credit to circumvent the regulation.

Jannic Cutura assesses the effect of the new bail-in rule under BRRD for market discipline in
the Eurozone. Exploiting the difference between yields of bonds maturing before 2016 and maturing later (where only the latter would be subject to the bail-in rule) before and after it became clear that the bail-in rule would be introduced he finds
evidence for a higher yield differential after markets realised that the bail-in rule was for real. I have still lots of question on specification and exact timing of different events, but clearly an interesting and highly relevant paper.

Does access to finance help with labour market mobility and employment? Yes, according to Bernardus Van Doornik, Armando Gomes, David
Schoenherr and Janis Skrastins who exploit random variation in the allocation of motorcycles through lotteries among participants in a financial savings product in Brazil. They find that individuals exhibit higher employment, earnings, and business ownership,
and commute further after obtaining a motorcycle compared to participants who did not yet win a motorcycle. And these effects are persistent rather than temporary.

Right after the conference I went
for a seminar at Bocconi. These visits do not only allow one to receive valuable comments on one’s own work but one also learns about other people’s work. In Milan, I met Thorsten Martin, whose job
market paper looks at the introduction of steel futures. There are lots of concerns that this just enables financialisation and speculation. But Thorsten shows that the creation of future markets increased price transparency in product markets. Higher
price transparency reduced producer surplus and customer material costs. This higher price transparency ultimately increased the market share of low-cost steel producers and thus aggregate productivity. This is really important work that shows that financial
markets (here derivative markets) help economic growth not through investment but rather by improving resource allocation, which is very consistent with an extensive body of work in the Finance and Growth literature.